Choppy waters: John Keogh, president and CEO of National Union Fire Insurance Company of Pittsburgh, Pa., the nation's leading writer of directors' and officers' liability insurance, calls the D&O market "unpredictable." He sat recently for an interview with Risk & Insurance. Our questions and his answers follow

Risk & Insurance, May, 2004 by Thomas J. Slattery

Is D&O pricing through the roof, out of control, as some contend?

No. I think you [shouldn't] judge it against where it was two years ago, when clearly it was ridiculously inexpensive, to the point of being highly unprofitable for the carriers. Go back further, perhaps a decade, and look at what D&O prices are today compared with then. Prices are just getting back to where they were then, maybe a little bit higher.

Furthermore, if you look at loss costs and expectations for D&O today, loss costs are multiples of what they were. And I think the exposure in terms of the environment we're in today is a lot more dangerous, a lot more severe than it was then. I'd argue that, all things being equal, prices should be much higher than 10 years ago and they're just getting back.

What's the biggest risk in D&O today?

The ones that get people's attention are the ones of blatant and egregious misbehavior by company executives, the ones that dominate the headlines like Worldcom, Tyco or Enron.

You may come with a dozen of those, but still the standard things we see today are the same sort of things we've seen before and will continue to see. Anytime a stock drops and management makes an announcement about a business not performing as well as expected, you get a lawsuit. It doesn't mean anyone did anything wrong; it doesn't mean anybody misrepresented or lied, much less committed fraud. They simply announced that something unexpected happened with their business and that leads to them having to dampen expectations for earnings, stock prices drop, and you get sued.

Unfortunately in this environment, that's very expensive. Whether it's the cost of defense against those kinds of suits, or whatever. You do nothing wrong as management. You run your business well.

The world is full of surprises and you have a surprise that's negative. Rest assured you'll get sued and rest assured it's going to cost millions of dollars to defend yourself and settle out that claim. We had 250 some-odd claims last year.

Do you still see opportunity here? Is it a good line of business to be in today, tomorrow?

I don't know. There's so much uncertainty in terms of what affects loss costs. It's a hard one to answer. I like the fact certainly that I've got 100 people that do nothing but handle security class claims and have been doing it for years and know what they're doing. That kind of expertise is going to allow us to weather the storm much better than others. We have core competencies that I feel good about. It's just that you pick up the paper every morning or watch the news every night and you keep hoping things are going to get better.

What's next for this product?

Underwriters who are worth their salt and are smart and honest will say they don't know. That's what's scary. I don't know that we could have seen coming a lot of what's gone on [and avoided it] by approaching underwriting any differently or more diligently.

The fact is there's a record number of SEC investigations going on right now. They've hired several hundred people in the past few years to go out and investigate. Where those investigations lead, I have no idea.